TED Case Studies

US-Canada Lobster Dispute



          CASE NUMBER:          43 
          CASE MNEMONIC:      LOBSTER
          CASE NAME:          Lobster Dispute

A.        IDENTIFICATION

1.        The Issue

     Is the Homarus Americanus (American Lobster) in danger of
extinction?  The case involves Canada and the United States and
was brought up for arbitration under the Canada-United States
Free Trade Agreement.  The panel determined that the species was
in danger of extinction and restrictions were placed on lobster
fishing rights.  However, there were side issues involving the
importation of Canadian lobsters into the United States and
administrative problems in distinguishing between the two
countriesū lobsters.  Here, the panel sided with the United
States on the grounds of administrative expense.

2.        Description

     In 1985 there was a large decrease in marine life in North
Atlantic waters, especially the American lobster (Homarus
americanus).  Scientists and lobstermen alike noticed the
depletion of the stock.  U.S. lobster-boat owners were threatened
by low stocks and import competition from the subsidized Canadian
fleet.(1) In 1989, the U.S. government took measures to ensure
effective management of U.S. commercial fishery stock (including
lobsters) by placing on the books the Magnuson Act Amendment. 
That move was quickly challenged by Canada as violating Article
407 of the United States - Canada Free Trade Agreement (FTA),
which incorporates Article XI of the General Agreement on Tariffs
and Trade (GATT).

     According to the Magnuson Act Amendment, it is illegal to
ship, move, sell or buy Homarus americanus lobsters that are
smaller than minimum size for harvesting determined through the
American Lobster Fishery Management Plan. It is also illegal to
deal in the lobsters if they are egg-bearing females or if there
is evidence their egg cases have been forcibly removed.(2)

     Canada challenged the new law as a de facto non-tariff trade
barrier and suggested the law was targeted at Canadian lobster
imports to the U.S.

     The United States argued that the new law was a legitimate
federal step to protect dwindling lobster populations, was
clearer than past regulation attempts and did not treat U.S. and
Canadian lobster fishers unequally.

     From a scientific perspective, the U.S. further argued, size
is a good measure of a lobsterūs maturity because the animals
grow by shedding their external shells, or ūmolting.ū American
lobsters molt 20 to 25 times between hatching and sexual
maturity, according to biologists. They generally reach U.S.
legal commercial size after five to seven growing seasons,
depending on water temperatures.

     The U.S. also argued that in the event GATT Article XI was
violated by the new lobster protection law, any oversight panel
should look instead to GATT Article XX (g), which sets up a
balancing test as to whether a restriction ūrelates to
conservationū or is a ūdisguised restriction on international
trade.ū (see TUNA case). 

      The United States cited the FTA Panel report in Herring and
Salmon case for the application of Article XX (g) in a situation
similar to the present one.  As specified in the report, a
measure must satisfy four conditions in order to qualify for an
Article XX (g) exemption: (1) the measure must relate to an
exhaustible natural resource; (2) domestic production or
consumption of the product must be limited; (3) the measure may
not create arbitrary or unjustifiable discrimination between
foreign countries; and (4) the measure must be primarily aimed at
conservation.

     The United States argued that lobsters are a natural
resource than can be exhausted by overfishing.  Second, United
States domestic production of lobsters is limited by a series of
state and federal measures.  Third, the amendment applies equally
to foreign and domestic lobsters. Finally, the amendment is a law
enforcement measure designed to prevent harvesting of small
lobsters in the United States.

     The Salmon and Herring Panel had devised two tests to
determine whether a measure is "primarily aimed at conservation"
(see SALMON case).  First, the panel sought to determine whether
the measure provided real conservation benefits and whether other
measures might have accomplished the same objective.  Second, the
panel sought to determine whether the measure would have been
adopted had the measure paid for its costs. 

     The United States argued that the 1989 amendment provides
genuine conservation benefits and, therefore, meets the first
test.  To support this argument, the United States claimed that
the amendment eliminates the harvest of sub-sized lobsters in the
American fishery by taking away any financial incentive at the
marketplace.  In addition, the United States argued that the
amendment was carefully drafted to avoid undue trade
restrictions, while serving as an important conservation measure. 
The United States contended that no practicable alternative to
the measures implemented by the amendment exists.

     The U.S. also argued the amendment meets the second test
because U.S. nationals have been bearing the costs of minimum
size requirements alone since 1988.  U.S. firms may not sell
sub-sized lobsters anywhere in the world, while third country
markets are open to smaller Canadian lobsters.

     Canada argued that GATT exceptions should be narrowly
construed and the United States had not met its burden of proving
the 1989 amendment falls within Article XX (g).  Canada contended
that the 1989 amendment was a disguised restriction on
international trade, adopted in response to the perception in the
U.S. Congress that American lobstermen were at a competitive
disadvantage.  The United States responded with an import ban on
Canadian small live lobsters.

     Although Canada agreed that lobsters are an exhaustible
natural resource, it maintained that the amendment was not
primarily aimed at conservation.  The 1989 amendment was not
directed as the catch in the United States waters and did nothing
to add to the conservation measure already in place.  Because the
1989 amendment banned only Canadian lobsters, Canada argued it
was not directed at U.S. lobster catches.

     Canada also argued that it faced excessive administrative
costs in helping the U.S. carry out the new restrictions, in part
because checks of U.S. catch are done at dockside but Canadian
lobsters face such checking and rejection when attempts are made
to import them to the U.S. by road or by air -- many more sites
to oversee, with resulting higher costs. Thus, the 1989 amendment
deals with the resource enforcement problem in a trade
restrictive manner and places the burden of the United States'
enforcement efforts on Canada.  Canada claimed that Article XX
disallowed the most trade-restrictive approach to deal with a
domestic situation.

     Finally, Canada argued that no effective restrictions exist
on the production of lobster in the United States.  Canada
pointed to the lack of uniform size restrictions among individual
states and the federal government.  Because state laws governing
the catch of lobster can be changed regardless of federal law,
Canada contended that the United States did not impose effective
conservation measures concerning lobster.

     A panel of experts was asked to broker the dispute under the
Canada-United States Free Trade Agreement (since succeeded by the
North American Free Trade Agreement).  Both the United States and
Canada sought answers to two questions:

     (1) Are the Magnuson Act amendments regarding size of
Homarus americanus lobsters taken for commercial use inconsistent
with the Free Trade Agreement and, through that, with GATT
Article XI?

     (2)  If so, could the Magnuson amendment be eligible for
exemption under GATTūs Article XX?

     The five-member panel was established and a majority
decision was issued on May 21, 1990.(g)  The majority agreed with
the United States, that it was within the U.S. federal
jurisdiction to ban the import of live lobsters that did not meet
a specific size requirement.

     In an odd turn of events, in 1991 there was a surge in the
number of lobsters in Canadian and U.S. waters.  There was no 
explanation for it; it was not necessarily attributed to the new
U.S. regulations. In some areas populations appear to have grown
yearly despite falling trends elsewhere -- in Connecticut, for
example. (g)    

3.        Related Cases

     TUNA Case
     TUNA2 Case
     SALMON Case
     DONUT Case
     CANCOD Case
     UKCOD Case
     SHRIMP Case
     SHARK Case

     Keyword Clusters         
     (1): Trade Product            = FOOD
     (2): Bio-geography            = OCEAN
     (3): Environmental Problem    = Species Loss Sea [SPLS]

4.        Draft Author:  Michaelle Burstin and Amy Craft

B.        LEGAL Filters

5.        Discourse and Status:  DISagreement and COMPlete

     The case was completed on May 21, 1990 when the five
panelists issued the final report. The majority determined that
the U.S. ban on lobster imports that did not meet a specific size
standard was not GATT-illegal and was in fact recognized under
Article III.

6.        Forum and Scope:  NAFTA and MULTIlateral

     The case forced the clarification of Articles III and XI in
the GATT.  As a result, both the United States and Canada drew
from FTA and GATT decisions to demonstrate how these articles had
been applied in the past.  Below are some of these relevant
decisions.
(1)  FTA Decisions
In the Matter of Canada' s Landing Requirement For Pacific Coast 
     Salmon and Herring, Final Report of the Panel, October
     16, 1989.  
(2)  GATT Decisions
Canada - Administration of the Foreign Investment Review Act, 
     L/5504, July 25,1983.
Canada - Import Restrictions on Ice Cream and Yoghurt, L/6568, 
     September 27, 1989.
Canada - Measures Affecting Exports Unprocessed Herring and 
     Salmon, L/6268, November 20, 1987.
European Community  Programme of Minimum Import Prices, Licenses 
     and Surety Deposits For Certain Processed Fruits and
     Vegetables, L/4687, October 4, 1978.
     European Economic Community - Restrictions on Imports of
Apples - Complaint by the United States, L/6513, June 9, 1989.
Japan - Restrictions on Imports of Certain Agricultural Products,
     L/6253, November 18,1987.
Japan - Trade in Semiconductors, L/6309, March 24, 1988.
     Panel on Import, Distribution and Sale of Alcoholic
     Drinks by Canadian Provincial Marketing Agencies,
     L/6304, February 5, 1988.
United States - Prohibition of Imports of Tuna and Tuna Products 
     from Canada, L/5198, December 22, 1981.
United States - Section 337 of the Tariff Act of 1930, L/6439, 
     January 16, 1989.
United States - Taxes on Petroleum and Certain Imported 
     Substances, L/6715, June 5, 1987.

7.        Decision Breadth: 117 (GATT signatories)

8.        Legal Standing:  TREATY

C.        GEOGRAPHIC Filters

9.        Geographic Locations

     a.   Geographic Domain : ATLANTIC
     b.   Geographic Site   : Northern Atlantic [NATL]
     c.   Geographic Impact : USA

     Prior to 1950, the lobster fishery in the United States
remained essentially in a shoal-water, coastal trap fishery. 
Since then, the lobster fishery has expanded to include deep
water trap fishery along the continental shelf off Southern New
England.  The off-shore lobster fishery industry in the United
States takes place from Rhode Island down to North Carolina. 
Today there are two major harvest areas in the United States: the
in-shore waters of coastal states from Maine to New Jersey out to
a depth of 40 to 100 meters and the Continental margin from
Corsair Canyon to Cape Hatteras (Rhode Island to North Carolina)
in depths of 100 to 600 meters.

     In Canada, there are three major areas of harvest: the Gulf
of St. Lawrence along the coasts of New Brunswick and Nova Scotia
and around Prince Edward Island (which accounts for 55 percent of
Canada's landings), the Gulf of St. Lawrence along the Coasts of
Quebec, and the Atlantic coasts of Nova Scotia, New Brunswick and
Newfoundland.

10.       Sub-National Factors:  NO

11.       Type of Habitat:  OCEAN

D.        TRADE Filters

12.       Type of Measure:  Import Standard [IMSTD]

     Under the Canada-United States Free Trade Agreement, a case
can be heard by a five member panel under section 1807 of the
agreement.  This permits an advisory panel to render advisory
opinions and recommendations dispute settlement.  This provides
for oral argument, written submissions, an initial report,
comments by the parties and a final report that must be issued
within 120 days of the formation of the panel.  

     Whether the amended Magnuson Act conflicts with obligations
of the United States under FTA Article 407 (which incorporates
GATT Article XI), a majority of three members of the Panel
concluded that there was no conflict.
13.       Direct vs. Indirect Impacts:  DIRect

     The regulations in place from 1988 through late 1989
     prohibited the marketing of virtually all domestic
     lobsters below the federal minimum size.  By contrast,
     the same sized Canadian lobsters could be bought and
     sold freely under federal law, whenever accompanied by
     written certification....The Magnuson Act
     amendment...served to redress an imbalance in the
     application of the federal minimum size restriction
     that had treated domestic lobsters more harshly than
     Canadian lobsters.  

14.       Relation of Measure to Environmental Impact

     a.  Directly Related     : YES  LOBSTer
     b.  Indirectly Related   : NO 
     c.  Not Related          : NO
     d.  Process Related      : YES  Species Loss Sea [SPLS]

15.       Trade Product Identification:  LOBSTer

16.       Economic Data

     In 1988, total landings of American lobsters were worth
$95.4 million for 14,462 metric tons.  Most of the landings were
in Maine, the leading lobster producing U.S. state.  For the
United States, most lobsters are consumed domestically and the
United States only exports 2,500 tons per year, valued at $23.5
million.  U.S. imports account for 45 to 50 percent of the total
lobster consumption in the United States.

     The United States claimed that the Canadian estimate of
trade effect was too high because small lobsters will continue to
be harvested.  The United States claimed that a more realistic
figure would lie between C$11.1 million and C$23.7 million
annually.

     More importantly, according to the United States, the 1989
amendment presented Canadian firms with viable options for
marketing lobster.  Specifically, the United States listed four
options for Canadian firms in responding to the amendment:

     a.   Allow the small lobsters to remain in the water to
     increase in size and reproduce;
     b.   Freeze, cook, or can small lobsters and sell them
     in the United States, Canada or abroad;
     c)   Sell small lobsters in Europe or Japan; and
     d)   Market small lobsters in a combination of b and c.

     The United States believed that should Canada chose option
"a" -- it would have minor adverse trade effects in the short
term and likely to be of net commercial benefit to Canada in the
medium and long term.  In 10 years Canada could see benefits
equal $C4.7 million annually.  

     In 1988, Canada's lobster landings were 40,392 tons.  Canada
sold 48 percent (19,619 tons) on the live lobster market and of
that, 14,528 tons was exported to the United States.  Most
Canadian lobster is exported to the United States.  In 1988, out
of 80 million pounds of lobster harvested in Canada, 56 million
were exported to the United States live, canned or frozen.  The
live lobster exports totaled almost 32 million pounds (14,528
tons) with a total export value of C$192 million.

     Both Canada and the United States agree that the proportion
of total lobster landings in Canada below the U.S. Federal
minimum lobster size requirements was between 8 percent and 8.4
percent in 1990, 12.1 percent and 12.4 percent in 1991 and 16.1
percent and 16.9 percent in 1992.  However, Canada asserts that
the percentage of these that are exported was much higher causing
adverse economic affects on Canada.  Canada asserted that the
number of live lobsters legally harvested from Canadian waters
which do not meet U.S. federal minimum size requirement and were
exported to the United States were actually much higher: 18
percent in 1990, 26 percent in 1991 and 34 percent in 1992.

     Based on an independent assessment prepared by a Canadian
accounting and management firm, Canada argued that implementation
of the 1989 amendment over the next three years would cost
Canadian lobstermen $127 million.  This calculation was based
on volume and value estimates of lobsters harvested in Canada in
1990-92, average growth in the Canadian harvest from 1986-88;
quantity and value of Canadian lobsters available for the live
market in 1990-92; percentage destined for the live market in
1986-88; quantity; the value of live lobsters expected to be
exported to the United States in 1990-92 based on the base
period; and an estimate of the percentage of the live catch
available for fresh consumption that falls below the United
States minimum size limits for 1990-92.

     Canada argued that trade effects could be even greater than
$127 million.  The 1989 amendment may increase Canadian lobster
prices to cover extra culling for the U.S. market.  Increased
price, in turn, might reduce the export market and any increased
supply of small fresh live lobsters could depress the price of
lobster in Canada and in third countries.

17.       Impact of Measure on Trade Competitiveness:  BAN

18.       Industry Sector:  FOOD

19.       Exporter and Importer:  CANADA and USA

E.        ENVIRONMENT Filters

20.       Environmental Problem Type:  Species Loss Sea [SPLS]

     The Magnuson Act Amendment was created to ensure uniform and
effective management of lobsters.  It was the result of concern
about overfishing and the need to safeguard lobster populations.
One of the important issues that the Panel had to determine was
whether Article XX(g) applied instead.  This measure attempts to
to determine if a measure actually 'relates to conservation' or
is a 'disguised restriction on international trade.'  In order
for a measure to fall under Article XX(g) the following four
conditions must be met:

     1.   The measure must relate to an exhaustible natural
     resource;
     2.   Domestic production or consumption of the product
     must be limited;
     3.   The measure may not create arbitrary or
     unjustifiable discrimination between foreign countries;
     and
     4.   The measure must be primarily aimed at
     conservation.

     The Panel decided by majority that Article III did apply. 
Therefore, Article XX (g) was not an issue for them but the
minority did examine Article XX(g)'s application and stated the
following.

     From what they regarded as unduly limited information
     made available to the Panel, these members were unable
     to draw a conclusion that the amendment was 'primarily
     aimed' at conservation.  They considered that the
     United States had not made the case strongly enough to
     lead them to conclude that conservation was the primary
     motivation.

21.       Name, Type, and Diversity of Species 

     Name:          Lobster
     Type:          Animal/Crustacean/Homarus Americanus
     Diversity:     Sustainable yield of
                    3,850,000 metric tons
                    /year (Northwest
                    Atlantic)

22.       Resource Impact and Effect:  LOW and REGULatory

23.       Urgency and Lifetime:  LONG and 3-5 years

24.       Substitutes:  LIKE products

     Pollock is being used as a lobster substitute.

VI.       OTHER Factors

25.       Culture:  NO

26.       Trans-Border:  YES

     This is a problem because the territory of the lobster cross
two national borders.

27.       Rights:  NO

28.       Relevant Literature

"Atlantic Industry Outlook to 1992."  Provincial Industry
     Economics Service - Atlantic (January 15, 1991).
Beamish, Rita. "Mulroney Visits Bush at Kennebunkport for 
     Business, Pleasure."  The Associated Press (August 30,
     1989). 
"Dispute Resolution Under U.S. - Canada FTA Examined at
     Administrative Conference Forum."  BNA International
     Trade Daily (May 3, 1991).
Federal Register.  Department of Commerce (December 4, 1987):
     46088.
Franckling, Ken.  "Stormy Seas: Disagreement over Stock 
     Depletion and Fishing Boundaries."  United Press
     International (August 25, 1985).
Holbein, Jim.  "Trade Agreements and Dispute Settlement
     Mechanisms in the Western Hemisphere."  Case Western
     Law Review Journal (Fall, 1993).  
Laidler, John.  "Lobsterman in a Boil Over New Size Limits;  New 
     England Regulations Intended to Protect Species."  The
     Washington Post (September 19, 1989): Section 1, pg.
     A3.
Lobsters from Canada.  Final Report of the Panel.  Secretariat
     File No. USA-89-1807-01.
Musante, Fred.  "Lobsterman are Delighted by the Catch, Not the
     Price."  The New York Times (August 11, 1991): Section
     12 CN, Page 1, Column 1.
Neimeyer, Edwin B.  "Roots -- How the Traditional Industries
     Prosper."  New England Business News (December 1990).
"President Reagan Transmits FTA Enabling Measure, Starts
     Fast-Track Clock Running."  International Trade
     Reporter (July 27, 1988). 
"Press Conference by President Bush and Canadian Prime Minister
     Brian Mulroney."  Federal News Service.  The White
     House (August 31, 1989).
"Stormy Waters."  Maclean's (December 25, 1989).
"U.S. Continues To Block Canadian Exports With Numerous Trade
     Barriers, Wilson Says."  BNA International Trade Daily
     (May 6, 1992).

                           References

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